Seller Concessions and Closing Cost Credits Explained

A seller concession is money the seller agrees to put toward your closing costs, which shrinks the cash you bring to the table. This guide covers what a concession can pay for, the common contribution limits, and how a seller credit differs from a lender credit.

Key takeaways

• A seller concession can pay for closing costs, prepaid items, discount points or a temporary buydown. It never pays for your down payment.
• Major loan programs cap how much a seller can contribute, and the cap is a percentage of the price or the appraised value.
• If the concession is built into a higher price, the appraisal has to support that price or the loan amount shrinks.
• A lender credit comes from the lender in exchange for a higher rate. A seller credit comes from the seller and does not change your rate.
• Both kinds of credit appear on the Loan Estimate, so they can be compared across offers line by line.

What is a seller concession?

A seller concession, sometimes called a seller credit or seller-paid closing costs, is an amount the seller agrees to pay toward the buyer's costs. It is written into the purchase contract, and at closing the settlement agent applies it against what you owe.

Concessions tend to be more common in slower markets, on homes that have sat for a while, and in new construction. Whether one is realistic depends on your market and your negotiation, while your loan program sets the ceiling.

What can a seller concession pay for?

Loan programs generally allow a concession to cover costs tied to getting the loan and settling the purchase, including:

• Lender fees such as origination, underwriting and processing charges.
• Third-party costs such as the appraisal, title search, title insurance, settlement fee and recording charges.
• Prepaid items such as prepaid interest, the first year of homeowners insurance and the initial escrow deposit.
• Discount points that permanently lower your rate.
• The escrow funds behind a temporary buydown, such as a 2-1 buydown.

Our guide to mortgage closing costs covers each bucket in more detail.

What can a seller concession not pay for?

The one thing a concession can never do is fund your down payment. Programs want the down payment to come from your own money or another allowed source, such as a gift. A concession also cannot be paid to you as cash, and it generally cannot exceed your actual closing costs. If the seller agrees to more than your costs add up to, the extra does not come back to you. The lender generally treats it as a reduction in the price instead, unless the contract is renegotiated.

How much can a seller contribute to closing costs?

Commonly cited caps run from 2 to 9 percent of the price or value, depending on the loan program, your down payment and how you will occupy the home. The limits apply to any interested party, which includes the seller. Programs update them from time to time, so your lender confirms the number for your loan.

Conventional loans

For conventional loans that follow Fannie Mae and Freddie Mac guidelines, the cap depends on your down payment and occupancy. For a primary residence or second home, the commonly cited limit is 3 percent with less than 10 percent down. It rises to 6 percent with at least 10 percent down but less than 25 percent. With 25 percent or more down, the commonly cited limit is 9 percent. For an investment property, the cap is commonly cited as 2 percent regardless of down payment. The percentage is measured against the lower of the purchase price or the appraised value, not the loan amount. Agent commissions the seller customarily pays do not count toward these caps.

FHA loans

FHA loans have a single commonly cited cap of 6 percent of the sales price, regardless of down payment size. That figure covers origination fees, other closing costs, prepaids, discount points and buydown funds combined.

VA loans

VA loans treat concessions differently. The seller is generally allowed to pay the buyer's customary closing costs, and those payments are not counted against a cap. Separately, the VA defines certain items as concessions, such as prepaid taxes and insurance, the funding fee, buydown funds or paying off a buyer's debts. Those concessions are commonly cited as limited to 4 percent of the property's established reasonable value, which the VA appraisal sets. A VA lender confirms how a contribution is counted.

What happens if a concession exceeds the cap?

The lender typically treats the excess as a sales concession and subtracts it from the price when calculating your loan amount. That lowers how much you can borrow and can leave you needing more cash.

How do seller concessions affect the price and the appraisal?

A concession does not raise the price by itself, but a seller who agrees to one often wants the price to rise by the same amount. The seller's net stays the same, and you finance the closing costs over the life of the loan. Many buyers accept that trade when cash is tight, but it has two catches.

First, the home still has to appraise. Your lender bases the loan on the lower of the purchase price or the appraised value. If the price was raised to absorb a concession and the appraisal comes in lower, the loan amount falls, and the gap becomes your problem.

Second, a higher price means a slightly larger loan and more interest over time. Where transfer taxes are based on the price, it also means a higher tax bill at closing. Many buyers ask their lender to show both versions on paper before deciding.

Seller credit vs lender credit: what is the difference?

A seller credit comes from the seller and leaves your rate alone, while a lender credit comes from the lender in exchange for a higher rate. Both reduce your cash to close and both appear on your Loan Estimate, and that is where the similarities end.

A seller credit comes from the seller's proceeds. It is negotiated in the purchase contract, it does not change your interest rate, and it is capped by your loan program.

A lender credit comes from the lender in exchange for a higher interest rate. The lender prepays some of your costs and recovers that money through a bigger payment every month. It is the mirror image of paying points. Federal disclosure rules also protect a lender credit shown on your Loan Estimate. It generally cannot be reduced at closing without a valid reason. A changed circumstance or a rate change before the lender locks your rate are two examples.

The two can stack. A buyer might negotiate a seller credit for most of the closing costs and take a small lender credit for the rest. Which mix fits depends on how long you expect to keep the loan and how much cash you want to hold back.

When you read a Loan Estimate, look for lender credits in Section J and seller credits in the Calculating Cash to Close table. Comparing those lines across offers shows which one costs less overall and which is simply moving money around.

How do you ask for closing cost assistance from the seller?

Seller concessions are negotiated in the purchase contract, not with the lender. A few habits tend to help:

• A closing cost estimate from a lender comes first. A specific figure is usually more persuasive than a request for "help with closing costs".
• Knowing the program cap before writing the offer matters. A request above the limit creates problems at underwriting even if the seller agrees.
• A straight credit and a price increase paired with a credit are different trades. The second finances your closing costs over the life of the loan.
• The credit goes in writing. Verbal promises do not make it to the closing table.

Frequently asked questions

What are seller concessions on a house?

A seller concession is an amount the seller agrees to pay toward the buyer's closing costs, prepaid items, discount points or a temporary buydown. It is written into the purchase contract and applied as a credit at closing, which reduces the cash the buyer needs to bring. It cannot fund the down payment or be paid to the buyer as cash.

What are the seller concession limits by loan type?

It depends on the loan program. For conventional loans on a primary residence, the commonly cited limits are 3, 6 or 9 percent depending on down payment size. Conventional investment properties are commonly capped at 2 percent, FHA loans at 6 percent, and VA concessions beyond customary closing costs at 4 percent. The lender confirms the exact figure.

What is the difference between a seller credit and a lender credit?

A seller credit comes from the seller's proceeds, is negotiated in the purchase contract and does not affect the interest rate. A lender credit comes from the lender in exchange for a higher interest rate, so it lowers cash at closing but raises the monthly payment. Both reduce cash to close, and both show up on the Loan Estimate.

Can seller concessions be used for the down payment?

No. Major loan programs require the down payment to come from the buyer's own funds or another allowed source, such as a gift. Seller concessions can only be applied to closing costs, prepaid items, points and buydown funds. Any amount beyond those costs is generally treated as a price reduction rather than paid to the buyer.

Do seller concessions raise the purchase price?

Not automatically. A seller can agree to a credit and keep the price where it is. Often, though, a seller asks for a higher price to offset the credit. Then the home has to appraise for the higher price, and a larger loan means more interest over time.

See the credits side by side

Seller concessions and lender credits both change how much cash you bring to closing, but only one of them changes your rate. On HomeTurf, N.M.L.S.-verified lenders compete for your loan in one place and cannot pay for placement. You can compare their rates, A.P.R. figures, fees, points and lender credits exactly as quoted. You stay anonymous until you choose a lender, and the choice is always yours.

When you are ready to gather competing offers and compare the credits they include, you can Start Your Auction. HomeTurf is a technology marketplace, not a lender, and it is free for borrowers.

Remember that this is general information, not financial advice, and every situation is different.

HomeTurf is a technology marketplace, not a lender or loan originator. This content is for general information only and is not financial or legal advice.